AI connectivity demand supports SMTC and MRVL results, but supply constraints and valuations limit the stock outlook

Overview

This report previews the upcoming results from SMTC and MRVL. Its central view is that AI spending will continue to dominate this week's off-cycle earnings: SMTC benefits from optical transceivers and emerging AI connectivity solutions, while MRVL benefits from network connectivity, custom chips, and XPU attach opportunities. The report is positive on the operating growth of both companies, but maintains Equal-weight ratings due to execution and macroeconomic risks, supply constraints, and high valuation, respectively.

Core views

The report first concludes that strong AI spending remains the key theme for this week's semiconductor earnings. Its AlphaSignals framework suggests that SMTC's data center revenue and MRVL's AI revenue could both surprise to the upside and drive modest upward revisions to consensus EPS forecasts over the next 12 months. Morgan Stanley also rates the North American semiconductor industry Attractive, while maintaining a more cautious Equal-weight stance on both stocks. For SMTC, the report expects another quarter of strong data center performance and outlook, driven primarily by optical transceivers and expanding AI connectivity opportunities. The model forecasts data center revenue growth of 35% quarter-over-quarter in the July quarter and another 22% quarter-over-quarter in the October quarter; total infrastructure revenue is expected to grow 26% and 18%, respectively, over the same periods. Although supply and foundry capacity may limit near-term upside, the report believes demand remains very strong, and the combined contribution from traditional optical transceivers, NPO, and ACC could still push actual results above forecasts. Over a longer horizon, SMTC's data center revenue is expected to grow approximately 100% in FY27 and another 57% in FY28. New products form the second layer of SMTC's growth thesis. NPO solutions provide approximately 2.5 to 3 times the value per bit of traditional optical solutions, and as scaling increases network bandwidth requirements, the company is participating across multiple architectures. The 1.6T transition is progressing well, and management expects market share to exceed 50% after the products ramp; ACC is expected to begin making a more meaningful contribution later in 2026. Therefore, beyond traditional optical transceivers, SMTC also has incremental growth drivers including NPO, 1.6T, and ACC. SMTC's July-quarter revenue is forecast at US$328 million, up 12.6% quarter-over-quarter and 27.2% year-over-year, broadly in line with consensus expectations of US$329 million. Signal Integrity revenue is expected to be US$127 million, up 24.6% quarter-over-quarter and 65.6% year-over-year; Analog Mixed Signal and Wireless revenue is expected to be US$110 million, up 9.5% quarter-over-quarter and 19.9% year-over-year; IoT Systems and Connectivity revenue is expected to be US$90 million, up 2.2% quarter-over-quarter and 1.6% year-over-year. Gross margin is expected to be 54.0%, approximately 30 basis points above the consensus expectation of 53.7%; EPS is expected to be US$0.60, slightly below the consensus expectation of US$0.61. For SMTC's October quarter, the report forecasts revenue of US$357 million, up 9.0% quarter-over-quarter and 33.7% year-over-year, slightly below the consensus expectation of US$360 million. Signal Integrity revenue is expected to be US$149 million, up 17.1% quarter-over-quarter and 82.4% year-over-year; Analog Mixed Signal and Wireless revenue is expected to be US$116 million, up 4.9% quarter-over-quarter; IoT Systems and Connectivity revenue is expected to be US$92 million, up 2.4% quarter-over-quarter. Gross margin is expected to be 54.2%, approximately 30 basis points above the consensus expectation of 53.9%; EPS is expected to be US$0.73, in line with consensus expectations. Outside SMTC's data center business, LoRa also remains strong. Management recently indicated growth of approximately 15% quarter-over-quarter and approximately 40% year-over-year, driven by expansion in smart metering, industrial automation, and new smart-home applications. The company also plans to divest Sierra Wireless's lowest-margin cellular module business in 4QFY27; following the transaction, pro forma gross margin is expected to be approximately 60%, and if the data center revenue mix continues to rise, long-term consolidated gross margin could move further above 60%. The forecast table shows revenue increasing from US$1.050 billion for the year ended January 2026 to US$1.375 billion, US$1.668 billion, and US$1.802 billion in January 2027, 2028, and 2029, respectively; non-GAAP gross margin rises from 52.8% to 53.9%, 54.9%, and 56.0%, while non-GAAP EPS increases from US$1.71 to US$2.72, US$3.67, and US$4.13. SMTC's US$175 price target is based on CY27 non-GAAP EPS of US$3.67 and a 48 times P/E multiple. This multiple is above that of general networking and analog semiconductor peers but is comparable to small-cap stocks with AI exposure, reflecting a balance between the data center outlook and broad-market exposure. The bull case uses CY27 EPS of US$3.84 and a 60 times P/E multiple, implying US$230, assuming above-expected data center growth, a stable macroeconomic environment, strong ramp-up of Linear and CopperEdge opportunities in 2026 to 2027, and multiple expansion; the bear case uses CY27 EPS of US$1.85 and a 50 times P/E multiple, implying US$95, assuming significant global macroeconomic pressure, a US recession, and almost no adoption of new data center technologies. The report believes SMTC trades below small-cap peers but maintains a "wait for validation" stance on new data center opportunities, while highlighting macroeconomic uncertainty and high leverage risks. For MRVL, the report expects continued strength in connectivity and broader AI momentum to drive an earnings beat and raised guidance, with networking the largest source of near-term upside. Although supply may constrain some growth, the report still believes results could exceed its forecasts for data center revenue growth of 16% quarter-over-quarter in the June quarter and 14% quarter-over-quarter in October-quarter guidance. AI revenue is expected to grow 60% in FY27 and 70% in FY28, with expansion of the total addressable market and a higher XPU attach ratio providing additional upside. MRVL's so-called April-quarter revenue is expected to be US$2.723 billion, up 12.6% quarter-over-quarter and 35.7% year-over-year, broadly in line with the consensus expectation of US$2.710 billion. Data center revenue is expected to be US$2.132 billion, up 16.3% quarter-over-quarter and 43.0% year-over-year; Communications and Other revenue is expected to be US$591 million, up 1.0% quarter-over-quarter and 14.6% year-over-year. Gross margin is expected to be 58.7%, close to the consensus expectation of 58.8%; EPS is expected to be US$0.92, close to the consensus expectation of US$0.93. Its July-quarter revenue guidance is forecast at US$3.009 billion, up 10.5% quarter-over-quarter and 45.0% year-over-year, close to the consensus expectation of US$3.020 billion; data center revenue is expected to be US$2.426 billion, up 13.8% quarter-over-quarter and 59.8% year-over-year, while Communications and Other revenue is expected to be US$583 million, down 1.4% quarter-over-quarter and up 4.7% year-over-year. Gross margin is expected to be 58.4%, approximately 10 basis points below the consensus expectation of 58.5%; EPS is expected to be US$1.05, slightly below the consensus expectation of US$1.07. MRVL's long-term thesis continues to improve. Last quarter, the company raised its data center growth outlook to 50% in FY27 and 55% in FY28, and the report believes the XPU attach market continues to expand. Over the next several years, scale-up networking could become one of the most important areas of AI infrastructure investment; as memory constraints persist, the importance of memory controllers will also increase. The Google TPU agreement is viewed as a significant development, with the full warrant framework implying a sizable long-term opportunity. The report focuses particularly on Kestrel and believes market expectations for CY27 ASIC and XPU attach growth of more than 100% may still be conservative, because Maia, Google TPU attach, and other projects could provide incremental upside. The ASIC strategy is also shifting from a few large projects toward more "singles and doubles" projects, using more XPU attach orders and smaller custom projects to achieve portfolio growth. This should improve customer and project diversification and may benefit margins. Valuation is MRVL's primary issue. The report states that its valuation multiple remains more than twice those of AVGO and NVDA, and further upside will require significant earnings estimate revisions rather than relying solely on continued multiple expansion or another increase in the long-term framework. Because of the Google opportunity, Morgan Stanley raised its CY27 Morgan Stanley Wealth EPS valuation multiple from 40 times to 45 times. Applying this to CY27 EPS of US$4.98, it raised the price target from US$195 to US$224, but this target remains below the current share price used in the report, so it maintains Equal-weight. The company's high stock-based compensation expense also tempers the report's positive stance. The bull case uses CY27 EPS of US$5.72 and a 60 times P/E multiple, implying US$343, assuming greater-than-expected AI opportunities, more cloud growth opportunities, and strong ramp-up of optical and early-stage XPU attach projects; the bear case uses CY27 EPS of US$4.33 and a 30 times P/E multiple, implying US$130, assuming continued weakness in storage and enterprise data centers, networking inventory continuing to offset custom ASIC growth, and the share price converging toward tangible book value. The report will reassess after earnings, while the investor day represents another potential catalyst. MRVL's forecast table shows GAAP revenue of US$8.195 billion for the year ended January 2026, rising to US$11.498 billion, US$16.161 billion, and US$21.394 billion in January 2027, 2028, and 2029, respectively; MW EPS increases from US$2.15 to US$3.01, US$4.98, and US$7.30. Over the same period, MW gross margin is expected to decline from 58.9% to 58.0%, 56.8%, and 56.0%, while inventory rises from US$1.388 billion to US$1.934 billion, US$2.687 billion, and US$3.284 billion. Inventory days are 126.2, 127.5, 126.9, and 118.0 days, respectively, indicating that growth is accompanied by margin and inventory-management pressures. Industry inventory data provide contextual constraints: semiconductor company inventory stands at 114 days, up 2 days quarter-over-quarter, compared with a seasonal increase of 5 days in the report, and 23 days above the historical median; semiconductor customer inventory increased 9 days quarter-over-quarter to 60 days, versus a seasonal increase of 8 days, and is also above the historical median; distributor inventory stands at 61 days, down 2 days quarter-over-quarter versus a typical seasonal increase of 4 days, but still 7 days above the historical median. These data indicate that strong AI demand does not mean industry-wide inventory pressure has completely disappeared. Regarding positioning metrics, active institutional ownership of SMTC and MRVL is 55.6% and 56.1%, respectively, while both have a hedge-fund industry long/short ratio of 2.1 times and industry net exposure of 33.6%.

Analysis framework

The report first uses an earnings preview and AlphaSignals to assess whether key KPIs may exceed expectations and how they could affect consensus EPS forecasts over the next 12 months. It then breaks down each company's quarterly revenue, business segments, gross margin, and EPS and compares them with consensus expectations. Next, it links near-term results to AI data center demand, supply capacity, new-product ramp-up, business mix, and customer projects, before deriving price targets using bull, base, and bear scenarios and forward P/E multiples. Finally, the report supplements the industry-cycle and market-positioning context with industry inventory days, historical medians, seasonal changes, and ownership data.

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward non-GAAP P/E valuation

  The report determines price targets by multiplying forecast CY27 EPS by a forward P/E multiple: the SMTC base case uses US$3.67 and 48 times, while MRVL uses US$4.98 and 45 times, with the multiples adjusted based on each company's peers and AI growth characteristics.

• Valuation Method

  Bull, base, and bear risk-reward scenarios

  The report sets different assumptions for revenue growth, technology adoption, the macroeconomic environment, EPS, and valuation multiples for each company to illustrate changes in price targets under optimistic, base, and pessimistic conditions.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analysis of AI demand and supply-capacity constraints

  The report assesses growth potential through demand for optical communications, network connectivity, and XPU attach on one hand, while examining whether foundry and overall supply capacity could constrain near-term revenue upside for SMTC and MRVL on the other.

• Industry/Sector Analysis Framework

  Supply-chain inventory days and seasonal comparison

  The report separately tracks inventory days at semiconductor companies, customers, and distributors and compares them with the prior quarter, seasonal changes, and historical medians to assess supply-chain inventory pressure and the degree of recovery.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Semtech Corp. (SMTC.O)

  Benefits from demand for AI data center optical transceivers, NPO, 1.6T, ACC, and LoRa, while the divestiture of the low-margin cellular module business should improve its profit structure.

  Strengths

  Data center revenue is expected to grow approximately 100% in FY27 and 57% in FY28; NPO value per bit is approximately 2.5 to 3 times that of traditional optical solutions; expected share exceeds 50% after the 1.6T ramp.

  Weaknesses

  New data center technologies still require validation, broad-market demand is affected by the macroeconomic environment, the company has high leverage, and supply and foundry capacity may constrain near-term growth.

  Comparison

  The 48 times CY27 non-GAAP P/E multiple is above that of general networking and analog semiconductor peers but is comparable to small-cap stocks with AI exposure.

  Risks

  Failure of new data center opportunities to materialize, a slowdown in hyperscaler capital expenditure, and macroeconomic weakness, tariffs, and geopolitical pressure weighing on the recovery of the analog business and consumer spending.

• Marvell Technology Group Ltd (MRVL.O)

  Benefits from network connectivity, the Inphi optical business, custom chips, and XPU attach opportunities such as Google TPU and Maia; the report expects results could beat expectations and guidance could be raised.

  Strengths

  AI revenue is expected to grow 60% in FY27 and 70% in FY28; opportunities in scale-up networking and memory controllers are expanding; more small and mid-sized custom projects should enhance diversification and improve margins.

  Weaknesses

  The valuation multiple is more than twice those of AVGO and NVDA, high stock-based compensation expense reduces its appeal, and supply constraints may also limit near-term upside.

  Comparison

  The base valuation was raised from 40 times to 45 times CY27 MW EPS, comparable to high-growth AI semiconductor companies, but the US$224 price target remains below the current share price used in the report.

  Risks

  AI opportunities falling short of expectations, continued weakness in storage and enterprise data centers, customer and channel inventory continuing to offset growth in the custom ASIC business, and networking performance falling below forecasts.

Key data

• SMTC data center revenue growthFY27 approximately +100%; FY28 approximately +57%Morgan Stanley forecast
• SMTC near-term data center revenue growthJuly quarter +35% quarter-over-quarter; October quarter +22% quarter-over-quarterTotal infrastructure revenue is expected to grow 26% and 18% quarter-over-quarter, respectively, over the same periods
• SMTC NPO valueApproximately 2.5 to 3 times that of traditional optical solutionsCalculated per bit
• SMTC expected 1.6T shareMore than 50%Management's expectation after the products ramp
• SMTC July-quarter forecastRevenue US$328 million; gross margin 54.0%; EPS US$0.60Consensus expectations are US$329 million, 53.7%, and US$0.61, respectively
• SMTC October-quarter forecastRevenue US$357 million; gross margin 54.2%; EPS US$0.73Consensus expectations are US$360 million, 53.9%, and US$0.73, respectively
• SMTC LoRa growthApproximately +15% quarter-over-quarter; approximately +40% year-over-yearRecently disclosed by management
• SMTC post-divestiture gross marginApproximately 60% pro formaSierra Wireless's cellular module business is expected to be divested in 4QFY27
• SMTC price-target scenariosBull US$230; base US$175; bear US$95Using CY27 non-GAAP P/E multiples of 60 times, 48 times, and 50 times, respectively
• MRVL AI revenue growthFY27 +60%; FY28 +70%Morgan Stanley forecast
• MRVL company data center outlookFY27 +50%; FY28 +55%Outlook raised by the company last quarter
• MRVL near-term data center revenue growthJune quarter +16% quarter-over-quarter; October-quarter guidance +14% quarter-over-quarterThe report believes there is still room to exceed forecasts
• MRVL so-called April-quarter forecastRevenue US$2.723 billion; gross margin 58.7%; EPS US$0.92Consensus expectations are US$2.710 billion, 58.8%, and US$0.93, respectively
• MRVL July-quarter forecastRevenue US$3.009 billion; gross margin 58.4%; EPS US$1.05Consensus expectations are US$3.020 billion, 58.5%, and US$1.07, respectively
• MRVL price-target revisionRaised from US$195 to US$224CY27 EPS valuation multiple raised from 40 times to 45 times
• MRVL price-target scenariosBull US$343; base US$224; bear US$130Using CY27 MW EPS P/E multiples of 60 times, 45 times, and 30 times, respectively
• Semiconductor company inventory114 daysUp 2 days quarter-over-quarter and 23 days above the historical median
• Semiconductor customer inventory60 daysUp 9 days quarter-over-quarter, versus a seasonal increase of 8 days
• Distributor inventory61 daysDown 2 days quarter-over-quarter, but 7 days above the historical median

Impact & implications

The report believes AI infrastructure spending is simultaneously driving opportunities for SMTC's optical transceivers, NPO, 1.6T, and ACC, as well as MRVL's network connectivity, optical, custom ASIC, and XPU attach businesses. SMTC has meaningful scope to improve its product mix after divesting its low-margin business, while MRVL could improve business diversification through a larger number of small and mid-sized custom projects. However, supply capacity may prevent near-term revenue from fully capturing demand, while industry inventory remains above historical levels. At the same time, MRVL's current valuation requires more significant earnings revisions for support, and SMTC must prove that its new data center opportunities can materialize.

Risks

• SMTC's new data center opportunities may fail to materialize, or adoption of new technologies may be lower than expected.
• Supply and foundry capacity may constrain near-term revenue upside for SMTC and MRVL.
• A slowdown in hyperscaler capital expenditure could weaken the data center growth outlook.
• Macroeconomic weakness, persistent tariffs, and geopolitical challenges could weigh on the recovery of analog semiconductors and consumer spending.
• SMTC faces macroeconomic uncertainty and high leverage risks.
• MRVL's AI opportunities may be smaller than expected, while storage and enterprise data centers may also remain weak.
• MRVL customer and channel inventory may continue to offset growth in the custom ASIC business.
• MRVL's valuation is significantly above those of AVGO and NVDA and requires substantial upward revisions to earnings forecasts for support.
• MRVL's high stock-based compensation expense may continue to weigh on market perceptions.

What to watch

• Monitor SMTC's results and data center revenue performance when reported on August 25, 2026.
• Track the ramp-up of SMTC's NPO, 1.6T, ACC, Linear, and CopperEdge projects and new data center partnerships.
• Monitor the deployment pace of LPO/CPO in optical connectivity and whether supply and foundry capacity constrain deliveries.
• Track SMTC's LoRa growth and progress on the divestiture of Sierra Wireless's cellular module business in 4QFY27.
• Monitor MRVL's results, networking performance, and whether guidance is raised when reported on August 27, 2026; the report body is inconsistent as to whether the release will occur before or after market.
• Track MRVL's Google TPU, Kestrel, Maia, and other ASIC and XPU attach projects.
• Monitor MRVL's investor day and further company commentary on long-term data center and AI opportunities.
• Track the recovery of MRVL's storage, enterprise data center, and networking businesses, as well as changes in high stock-based compensation expense.
• Continue monitoring changes in inventory days at semiconductor companies, customers, and distributors relative to seasonal patterns and historical medians.